By Petri RedelinghuysFUNDAMENTALS
marketplace trading 101
18 finweek 15 August 2019 http://www.fin24.com/finweekw
hen we embark on the road to trading,
we’re usually determined to learn as
much as we can about, for example,
technical analysis, the practical things
about how markets work, and ways that we can ‘predict’
what price is going to do. It is the same for most people –
it was the same for me.
It takes us some time to truly understand that we
cannot predict the future – no matter how much analysis
we do. We tend to look for a strategy that gives us a logical
and statistical edge. We might even build our own strategy
and use historical data to back-test it. But whenever we
trade that strategy in accordance with our set of rules, we
still seem to keep losing.
We then seek out other, better strategies. This is a
dangerous trap. Because while the knowledge quest is a
good thing and should be never-ending, it takes us a long
time to realise that the problem isn’t with the strategy.
Rather it’s that we’re sabotaging ourselves.
As humans, we have two primary drivers:
fear and greed. Think about it: Every
single emotion that we as humans feel
can be traced back to one of these
two primary emotions. We love,
ultimately, because we want to feel
fulfilled. (Sometimes we marry
the wrong people because we are
afraid of being alone.)
This might be an extreme
example, but it illustrates how these
emotions subconsciously dictate our
choices throughout life. More on topic
though, these two emotions cause us to
make sporadic or illogical choices that are
not always in our best interest.
Like the choice to trade the bear flag before it’s broken
out of the formation. Or the choice to not execute your
stop-loss because you believe that the trade will still
work out in your favour. The choice to trade five contracts
instead of one. The decision to stop out and put on the
opposite position, only to be wrong again. And to then
again stop out and put on the opposite position... over
and over. It’s a collection of small, subconscious decisions
that make us break the rules of our strategy without even
being consciously aware of it.
If we hope to make it as traders, we have to make
time for some introspection. We have to understand our
own emotions and how they influence our decisions. WeWhy you always need to
stick to your strategy
Investors are humans, too – which means emotions can influence one’s trade decisions. Maintaining discipline is key
in helping you to avoid making those emotionally driven mistakes.Pho
to:
Sh
utt
ers
toc
k^
must learn to literally get up from our desks and walk
away for five minutes, especially when we feel emotional,
upset, excited, or sad – or any emotion other than calm,
disciplined, logical and patient.
We must learn to will ourselves into a state of mind
where we accept that what we are doing is unpredictable
and we will sometimes lose money. It’s okay – as long as
we followed the rules exactly. Our desire to make money,
and our fear of losing it, causes us to make poor decisions.
We must learn to recognise when those emotions are in
charge and we must allow them to pass before we make
any decisions.
The truth is that even the simplest of trading
strategies can make us money if we follow it absolutely.
Even just using some basic principles like identifying
the trend – and never trading against it. Or making use
of stop-losses. Or making sure that every trade has at
least a 1:2 risk-reward ratio. But when we’re actually
sitting down and doing it, we get caught up in the swirl of
subconscious drivers that fuel mistakes.There are a few principles that can
help us maintain the discipline
to act logically when our heads
start to swirl:- We cannot predict what is going to
happen. We can only ensure that our
strategy provides a high probability of
our ‘forecast outcome’ happening. - Even if our forecast outcome is
highly probable, it doesn’t mean that it
will happen. - It takes many trades for a strategy to
generate returns. It is inevitable that some
trades will be losers. - If we follow our strategy exactly, there will be winning
trades. - If we follow the ‘risk management rules’, even if we only
have winning trades half the time, we will make money. - It’s okay to miss a trade when you’re not in the right
mindset. There will be another opportunity. - If we feel like making a trade that does not meet all the
requirements of our strategy exactly, we must walk away.
There is more to this, of course, but the first step is
to make sure that we do not make emotionally driven
mistakes. ■
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Petri Redelinghuys is a trader and the founder of Herenya Capital Advisors.